August 1, 2018 / 10:17 AM / 8 months ago

Breakingviews - BNP’s targets have bite despite muzzled traders

LONDON (Reuters Breakingviews) - Europe’s de facto investment banking champion has egg on its face. BNP Paribas may have unofficially usurped hapless Deutsche Bank as Europe’s leading investment bank, but it resorted to blaming a “lacklustre context” in fixed income markets for a 27 percent year-on-year slide in first-half investment banking pre-tax profit. Luckily, boss Jean-Laurent Bonnafé has other irons in the fire.

Woefully, BNP’s investment bank performance in the second quarter was little better than Deutsche’s. Fixed income trading revenue fell by 17 percent year-on-year in the second quarter. Compared to the first half of 2017, the decline was one quarter.

Admittedly, Bonnafé’s credit traders are muzzled. While U.S. rivals benefit from better pricing thanks to the Federal Reserve’s tapering policy, the European Central Bank won’t stop expanding its balance sheet until the end of this year. That implies corporate funding costs will stay low and weak demand for bonds and hedging from companies that are in any case already well funded.

Still, trading accounts for only 13 percent of revenue at BNP, or less than half the proportion at Deutsche. Meanwhile, robust group loan growth of 3.7 percent year-on-year should support BNP’s annual group revenue growth target of 2.5 percent per annum until the end of 2020, aided by a 5.8 percent increase in outstanding loans in France, its biggest single market.

BNP already managed a respectable 11.2 percent return on tangible equity over the first half, despite the trading slip. Assume it hits analysts’ consensus revenue forecasts of 45.3 billion euros next year – a 5 percent increase on 2017. If the lender achieves cost targets of an additional 900 million euros in savings earmarked by 2019, it would hit its 10 percent return on equity target a year early, according to a Breakingviews calculation. That assumes a tax rate of 28 percent, projected loan-losses of 2.6 billion euros, and a book value per share of 72.40 euros.

The market clearly remains sceptical – BNP shares still trade at only 76 percent of book. Hitting return targets early would be a sure-fire way of closing that discount.


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